Transcript
AB 3 (Revised) Revised November 2017 Accounting Bulletin 3 (Revised) Guidance on Disclosure of Directors' Remuneration COPYRIGHT Copyright 2017 Hong Kong Institute of Certified Public Accountants This Accounting Bulletin contains Hong Kong Institute of Certified Public Accountants copyright material. Reproduction in unaltered form (retaining this notice) is permitted for personal and non-commercial use subject to the inclusion of an acknowledgment of the source. Requests and inquiries concerning reproduction and rights for commercial purposes should be addressed to the Director, Operation and Finance, Hong Kong Institute of Certified Public Accountants, 37/F., Wu Chung House, 213 Queen's Road East, Wanchai, Hong Kong. Copyright 2 AB 3 (Revised November 2017) ACCOUNTING BULLETIN 3 (Revised in November 2017) Accounting Bulletins are informative publications issued by the Financial Reporting Standards Committee on subjects of topical interest and are intended to assist members of the HKICPA or to stimulate debate on important accounting issues. They do not require the approval of Council and they do not have the same authority as either HKFRSs or Accounting Guidelines. This Accounting Bulletin supersedes Accounting Bulletin 3 issued in January 2000 and has been developed in consultation with Companies Registry in so far as the provisions in the Hong Kong Companies Ordinance Cap. 622 and the Companies (Disclosure of Information about Benefits of Directors) Regulation Cap. 622G are concerned. It provides general reference on the requirements of the Hong Kong Companies Ordinance Cap. 622 and Cap. 622G with respect to the disclosure of directors' remuneration in notes to the financial statements. It does not contain all the requirements of Cap. 622 and Cap. 622G, nor it does introduce additional accounting, disclosure or legal requirements. It also does not contain all requirements that relate to remuneration disclosure requirements under other applicable rules and regulations with which a company must comply with and make the necessary disclosure. Companies are requested to refer to all requirements relevant to the company when making its remuneration disclosures. Users of this Accounting Bulletin should consider taking their own legal advice if in doubt as to their obligations under the Hong Kong Companies Ordinance as the HKICPA and the authors do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this Accounting Bulletin, whether such loss is caused by negligence or otherwise. CONTENTS Paragraphs INTRODUCTION STATUTORY AND OTHER REQUIREMENTS General requirements Supplementary provisions in the Regulation Auditor's responsibilities under section 407(4) of the Companies Ordinance Listed companies in Hong Kong Other regulatory requirements 24 PRACTICAL ISSUES An employee acting as an alternate director A person is a director for only part of a financial year A company is a subsidiary undertaking for only part of a financial year Other matters relating to timing of disclosure Consideration provided to or receivable by third parties for making available the director's services Distinguishing between services 'as a director' and 'otherwise in connection with the management of the affairs' Apportioning payments between holding company and subsidiary undertakings Copyright 3 AB 3 (Revised November 2017) Expenses allowance. 55 Guidance on valuing and disclosing benefits in kind Presentation in the financial statements APPENDIX: EXAMPLES OF DISCLOSURES IN NOTES TO FINANCIAL STATEMENTS Copyright 4 AB 3 (Revised November 2017) INTRODUCTION 1. Section 383 of the new Hong Kong Companies Ordinance, Cap. 622 (CO) requires that the financial statements of a company incorporated in Hong Kong must contain, in the notes to the financial statements, the information prescribed by Companies (Disclosure of Information about Benefits of Directors) Regulation, Cap. 622G (the Regulation) in relation to the following 1 : (a) directors emoluments; (b) directors retirement benefits; (c) payments made or benefit provided in respect of the termination of the service of directors; and (d) consideration provided to or receivable by third parties for making available the services of a person as director. 2. This Accounting Bulletin sets out the Financial Reporting Standards Committee's understanding of the requirements in paragraph 1. This Accounting Bulletin also provides general reference on common practical issues encountered in preparing the required information. Hereafter, all references to sections are to sections of the Regulation unless otherwise stated. 3. Many of the requirements of the Regulation in this area have been brought forward from section 161 of the predecessor Companies Ordinance (Cap. 32). However, the Regulation has clarified, and in some cases broadened, the scope of the requirements. This Accounting Bulletin is intended as reference for complying with the Regulation. It therefore does not distinguish between whether any requirement is a new requirement introduced by the Regulation or is a requirement derived from the predecessor Ordinance. For further information on the changes made to the requirements in this area, reference can be made to the Briefing Notes prepared by the Companies Registry and available on its website at 4. The requirements of section 383 of the CO and the Regulation are effective for financial years beginning on or after 3 March STATUTORY AND OTHER REQUIREMENTS General requirements 5. The disclosure requirements relating to this topic are set out in section 383 of the CO and the Regulation. A company is required to show, in the notes to the financial statements, the following information: (a) (b) the aggregate amount of directors' emoluments paid to or receivable by the directors of the company in respect of their qualifying services; the aggregate amount of retirement benefits paid to or receivable by the directors or former directors of the company in respect of their qualifying services; 1 Section 383 of the CO also requires information in connection with dealings with directors and material interests of directors in transactions, arrangements or contracts that are significant in relation to the company's business to be disclosed in the notes to the financial statements (e.g. loans or quasi-loans in favour of directors, transactions, arrangements etc., such as were previously required by sections 161B and 161BA of the predecessor Companies Ordinance, Cap. 32.) These other discloseable transactions are outside the scope of this Accounting Bulletin. 2 The requirements of section 161 of the predecessor Ordinance (Cap. 32) are effective for financial years beginning before that date. Copyright 5 AB 3 (Revised November 2017) (c) the aggregate amount of the payments or benefits in respect of termination of directors services made or provided to or receivable by the directors, former directors or shadow directors of the company in respect of the termination of the qualifying services of the directors, former directors or shadow directors distinguishing further into sums paid by or receivable from:- (i) (ii) the company; the company's subsidiary undertakings; and (iii) any other person 3. (d) The aggregate amount of consideration provided to or receivable by any third party for making available the qualifying services of a person as a director of the company or in any other capacity while as director. 6. In the case of items a, b and c above, the aggregate amount is required to be distinguished between information relating to: (a) (b) services as (or, in the case of c, loss of the office as) a director; and other services in connection with the management of the affairs of the company or its subsidiary undertakings (or, in the case of c, in respect of the termination of such services). In addition, if any of the amounts to be disclosed under a, b, c or d consists of a benefit that is not paid in cash, then the nature of that non-cash benefit needs to be disclosed. Meaning of 'qualifying services' 7. 'Qualifying services' are defined in section 3(1) as: (a) (b) services as a director of the company concerned; or; while a director of the company concerned, services as: (i) (ii) a director of a subsidiary undertaking of the company concerned; or other services in connection with the management of the affairs of the company concerned or its subsidiary undertaking. The distinction in the definition between providing services 'as a director' (i.e. categories (a) and (b)(i) above) and providing services 'in connection with the management of the affairs of the company or its subsidiary undertakings' (i.e. category (b)(ii) above) is an important one for disclosure purposes, as each type of remuneration is required to be distinguished between these two broad categories. See paragraphs 39 to 43 below for further guidance on this area. 3 Section 3 of the Interpretation and General Clauses Ordinance (Cap. 1) defines 'person' to include any body of persons, corporate or unincorporated. 'Any other person' could therefore include the company s holding companies, fellow subsidiaries, associates or in fact any other company, as well as including other persons, such as natural persons or partnerships. Copyright 6 AB 3 (Revised November 2017) 8. The definition of 'qualifying services' focuses on the services of a person while he or she is a director of the company that is preparing the financial statements. There is no distinction made in the Regulation between the disclosures to be made in the consolidated financial statements or company-level statements of that company. To illustrate, consider this example: Company H has one subsidiary, company S. Mr A is a director of both company H and company S while Mr B is only a director of company S. Mr A s compensation is $2million, $500,000 of which relates to his services to company S, while Mr B s compensation is $600,000. In this example the Regulation would require the following amounts to be disclosed in respect of these two individuals: In company H s financial statements the directors emoluments to be disclosed are $2 million i.e. relating only to Mr A s services to the group headed by company H. It is irrelevant whether company H is preparing consolidated or company-level financial statements: in both cases the amount to be disclosed is $2 million. This disclosure includes the amount relating to the services that Mr A provides to company S. In company S s financial statements the amount of directors emoluments to be disclosed is $1.1 million i.e. the emoluments receivable by Mr A and Mr B for being directors of company S. The remainder of Mr A s emoluments are not discloseable by company S. See paragraphs 29 to 30 and 44 to 54 below for further guidance on this area. Meaning of 'subsidiary undertaking' is extended to non-controlled entities 9. Section 16 of the CO states that a reference to 'subsidiary undertaking' is to be construed in accordance with Schedule 1 of the CO. As Schedule 1 differs in certain key respects from the requirements of Hong Kong Financial Reporting Standard (HKFRS) 10 Consolidated Financial Statements, it is possible that the term 'subsidiary undertaking' as used in the Regulation may include entities that would not fall within the definition of a controlled 'subsidiary' under HKFRS 10. This could be the case, for example, when a company owns more than 50% of the equity shares of another company but a shareholders agreement restricts the company s ability to exercise unilateral control. In this case the investee is a 'subsidiary undertaking' within the meaning of Schedule 1, even though for accounting purposes the investee is a joint venture or an associate, not a subsidiary. In these circumstances, the Company is encouraged to explain in the financial statements the different meaning of these terminologies. 10. Section 3(4) of the Regulation extends this definition further for the purposes of disclosure requirements for directors' remuneration set out in sections 3 to 12 of the Regulation 4. According to sections 3(4) for this purpose, the term 'subsidiary undertaking' also includes any other undertaking, not just a subsidiary undertaking of the company as defined in Schedule 1 of the CO, if the person is or was a director of the company and also a director of that undertaking by virtue of the company s nomination (whether direct or indirect). Section 2(c) says that a reference to an undertaking has the meaning given by section 1 of Schedule 1 of the CO i.e. a body corporate, a partnership or an unincorporated association carrying on a trade or business, whether for profit or not. 4 Section 3(4) refers to these sections collectively as this Part i.e. Part 2 of the Regulation. Copyright 7 AB 3 (Revised November 2017) 11. This means that if a company has nominated one or more of its directors to sit on the boards of any of the company s investees, whether they are subsidiaries, joint ventures, associates or other investments, then any remuneration paid to or receivable by that person or persons in respect of that extra role may need to be included in the directors remuneration disclosed by the investor company, unless the director occupies that position for reasons other than because of nomination rights held by the company. To illustrate, consider this example: Company A has nominated one of its directors to the board of its associate, company B. Company B pays $250,000 per year to the director in respect of his services to the company. As the director has been nominated by company A as a director of the associate, the associate is deemed to be a subsidiary undertaking (for the purposes of directors remuneration disclosure). The director is performing qualifying services for company A by being its representative on company B s board. So, in this situation, the director must disclose to company A, the $250,000 that he receives as remuneration from company B. Company A includes the $250,000 in its aggregate disclosure of emoluments paid to or receivable by its directors in respect of their qualifying services under section 4(2) and (3)(a). If the $250,000 were paid directly to company A (that is, as a sum to be accounted for to the company) and not to the director personally, this amount would not be included as directors emoluments in company A s financial statements (section 11(1)(a)). Company B should disclose the payment of $250,000 in its own financial statements as a sum paid to a third party in respect of the director s services (section 7). Although nomination rights are likely to be held where the company is an investor, this may not necessarily be the only case. Section 3(4) applies wherever a company nominates one of its directors to be a director of any other undertaking. For example, an asset management company may nominate one of its directors to be a director of one or more of the funds, which it manages but in which it has no investment. Copyright 8 AB 3 (Revised November 2017) Details on the four categories of disclosures 12. Directors emoluments (section 4) Directors' emoluments relate to amounts paid to or receivable by a person in respect of qualifying services provided during the financial year while he or she was a director of the company. Per section 4(6) these amounts include: fees, percentages, salaries and bonuses; expense allowances (less the amounts actually spent on the expenses for which the allowances were made); contributions paid under a retirement benefits scheme, by any person other than the director, in respect of the director; and other benefits whether in cash or otherwise (in the case of non-cash benefits, the amount discloseable is the estimated money value of the non-cash benefit 5 ); but exclude any retirement benefits to which the director is entitled under any retirement benefits scheme 6. Section 10(2) also states that a reference to a payment to or receivable by a director includes - a payment to or receivable by a connected entity of the director; and a payment to a person made or to be made at the direction of, or for the benefit of, the director or a connected entity of the director. The practical effect of section 10(2) is that when the payment directly or indirectly benefits the director or an entity connected to him (such as his family or business associates), it should be categorized as directors emoluments and not as a payment to a third party. See paragraph 16(c) below for further guidance on this area. 13. Directors retirement benefits (section 5) Directors' retirement benefits relate to amounts paid to or receivable by a person in connection with their retirement as a director 7 who earned the entitlement to the retirement benefits by providing qualifying services while he or she was a director of the company. Per section 3(1) this category includes any lump sum, allowance, gratuity, periodical payment or other like benefits, any other property, or any other benefit whether in cash or otherwise given or to be given: 5 See paragraphs 56 to 62 below for further guidance on this requirement. 6 These may be discloseable under section 5 instead. For example, where a payment is made to top up a retirement benefits scheme for a director s benefit on his retirement or the company enhanced his pension by giving the director extra years of pensionable service funded out of a surplus in the scheme. See paragraph 13 below. 7 Per section 3(2)(a) for the purposes of section 5 a reference to a director includes a former director. Copyright 9 AB 3 (Revised November 2017) 13. Directors retirement benefits (section 5) (continued) (i) on or after the retirement or death of the person (including any annuity or other benefit paid or payable under any insurance policy on or after the retirement or death of the person); (ii) in anticipation of the retirement of the person; or (iii) in connection with the person s service rendered before the retirement or death of that person; and any benefits paid or to be paid under the Mandatory Provident Fund Schemes Ordinance (Cap. 485) 8. It is clear from section 5 of the Regulation that the amount to be disclosed would include the estimated money value of any noncash benefits. For example, if the company allowed retiring directors to retain share options which would normally lapse on leaving the company, or continued to provide free or subsidised accommodation to retired directors, or to buy medical insurance for them, then these would fall under the heading 'retirement benefits'. However, retirement benefits as defined in section 3 do not include: any benefit for personal injury or death by accident arising out of and in the course of employment; and any retirement gift of a value (or, in the case of a retirement gift made otherwise than in cash, an estimated money value) not exceeding HK$50,000. The above sets out the definition of 'retirement benefits' as per section 3. However, in terms of the actual disclosure of retirement benefits under section 5, the following sections are also important to note: Section 10(2) effectively requires that the disclosure of retirement benefits should include retirement benefits paid to an entity connected with the director (such as his/her family or business associates) (see paragraph 16(c) below for further guidance on this area). Section 5(4) states that retirement benefits paid out of a retirement benefit scheme are disregarded if the contributions made under the scheme were substantially adequate to maintain the scheme 9. 8 In practice, although MPF benefits explicitly fall within the definition of 'retirement benefits' under section 3(1), they are exempted from actual disclosure under section 5, as section 5(4) states that any amount of retirement benefits paid or receivable under a retirement benefits scheme is disregarded if the contributions made under the scheme ar
